OTTER TAIL CORPORATION You should read the following discussion and analysis of our financial condition and results of operations together with our interim financial statements and the related notes appearing under Item 1 of this Quarterly Report on Form 10-Q, and our annual financial statements and the related notes along with the discussion and analysis of our financial condition and results of operations contained in our Annual Report on Form 10-K for the year ended December 31, 2020.Otter Tail Corporation and its subsidiaries form a diverse group of businesses with operations classified into three segments: Electric, Manufacturing and Plastics. Our Electric business is a vertically integrated, regulated utility with generation, transmission and distribution facilities to serve our customers in westernMinnesota , easternNorth Dakota and northeasternSouth Dakota . Our Manufacturing segment provides metal fabrication for custom machine parts and metal components and manufactures extruded and thermoformed plastic products. Our Plastics segment manufactures PVC pipe for use in, among other applications, municipal and rural water, wastewater, and water reclamation projects. COVID-19 We continue to monitor the progression of the novel coronavirus (COVID-19) and its impact on our businesses, employees, customers, construction contractors and vendors. As this pandemic continues, we are following the directives and advice of government leaders and medical professionals and have adopted practices to help curtail the spread of the virus and mitigate its impact on our communities, employees, construction contractors, customers and business operations. Beginning inMarch 2020 , COVID-19 and the resulting economic conditions negatively impacted operating results of our Manufacturing segment as customer demand declined significantly in the second quarter of 2020. Sales volumes strengthened in the third and fourth quarters of 2020 due to strong recreational vehicle and lawn and garden end-market demand. Our Electric and Plastics segments operating results were also impacted in 2020. Within our Electric segment, we experienced reduced demand from commercial and industrial customers and increased costs for bad debts. In our Plastics segment, we experienced lower sales volumes in the second quarter of 2020 as distributors of our products reduced inventory levels given the uncertainty of the potential impact of COVID-19. Sales volumes recovered and gross profit margins increased in the third and fourth quarters of 2020, and have continued to increase in 2021, due to increased demand and supply disruptions. The impact of COVID-19 and the resulting macroeconomic conditions on our business and financial results began to ease in the first quarter of 2021 and continued to do so through the third quarter of 2021. However, uncertainty remains regarding the magnitude and duration of the pandemic and resulting financial effects. Increased infection rates and any future responses to mitigate the spread of the virus, including any potential vaccination mandates that would apply to our employees, could impact our business and our financial results in future periods. Recently, theDepartment of Labor's Occupational Safety and Health Administration ("OSHA") drafted an emergency temporary standard requiring all employers with at least 100 employees to ensure their employees are fully vaccinated or require weekly testing for unvaccinated employees. OnOctober 12, 2021 ,OSHA sent a draft of the standard to theWhite House regulatory office for approval and it is anticipated to be acted upon soon. Additionally,President Biden issued an executive order onSeptember 9, 2021 , which requires employees of certain federal contractors and covered subcontractors to be vaccinated, with no weekly testing option, unless they have an approved disability or religious exemption. We expect one, or both, of these new regulations will apply to at least some, and possibly all, of our businesses. The exact impact the new regulations could have on our companies is uncertain at this time. However, it could result in employee attrition, difficulty fulfilling future labor needs, additional costs related to compliance and may have an adverse effect on our future operating results. We continue to monitor developments involving our workforce, customers, construction contractors, suppliers and vendors and the financial effects on our business. However, due to the unprecedented and evolving nature of this pandemic, we cannot predict the full extent of the impact COVID-19 will have on our operating results, financial condition and liquidity. RESOURCE MATERIAL AVAILABILITY AND PRICING Supply shortages of steel and resin, two key material inputs to our Manufacturing and Plastics segments, respectively, have impacted our operating results in 2021. Steel supply shortages arose primarily due to steel mill capacity reductions in 2020 in response to lower steel demand due to COVID-19. Production and availability of steel have begun to improve as steel mill facilities have increased production capacities in response to strong market demand for steel products. The combination of steel supply shortages and strong demand has led to significantly increased steel prices. The increase in steel prices has led to increased sale prices for our products at BTD, our metal fabrication business within our Manufacturing segment, as we pass along material cost increases to our customers. In addition, limited steel availability has led to increased complexity in managing our business, including our production schedules, and other increased costs. We anticipate increased steel prices will continue throughout the remainder of 2021 and into 2022. Resin shortages initially arose as a result of production plant shutdowns due to abnormally low temperatures and ice storms in theGulf Coast region ofthe United States in the first quarter of 2021 and have been exacerbated by hurricane activity in the third quarter of the year. These supply constraints, along with robust domestic and global demand for PVC resin, have led to significantly increased resin prices. The increase in the price of resin, the primary material input into the PVC pipe manufactured by our Plastics segment businesses, along with strong customer demand for PVC pipe and low pipe inventories, due to the resin supply constraints, have led to rapidly increased sales prices for PVC pipe. The increase in sale prices has outpaced the increase in resin costs, leading to expanding gross profit margins and a significant increase in net earnings in our Plastics segment. We anticipate these market dynamics will persist through the remainder of 2021 and continue during the first half of 2022. We currently expect these conditions to subside beginning in the second half of 2022. The marketplace dynamics impacting both our Manufacturing and Plastics segments are fluid and subject to change which may impact our operating results prospectively.
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Table of Contents RESULTS OF OPERATIONS - QUARTER TO DATE Provided below is a summary and discussion of our operating results on a consolidated basis followed by a discussion of the operating results of each of our segments: Electric, Manufacturing and Plastics. In addition to the segment results, we provide an overview of our Corporate costs. Our Corporate costs do not constitute a reportable segment but rather consist of unallocated general corporate expenses, such as corporate staff and overhead costs, the results of our captive insurance company and other items excluded from the measurement of segment performance. Corporate costs are added to operating segment totals to reconcile to totals on our consolidated statements of income. Intersegment transactions were not material in 2021 or 2020 and amounted to less than$0.1 million of operating revenues and operating expenses for each period. CONSOLIDATED RESULTS The following table summarizes consolidated operating results for the three months endedSeptember 30, 2021 and 2020: (in thousands) 2021 2020 $ change % change Operating Revenues$ 316,294 $ 235,755 $ 80,539 34.2 % Operating Expenses 241,766 183,026 58,740 32.1 Operating Income 74,528 52,729 21,799 41.3 Interest Charges 9,648 8,568 1,080 12.6 Nonservice Cost Components of Postretirement Benefits 505 842 (337) (40.0) Other Income 203 1,712 (1,509) (88.1) Income Before Income Taxes 64,578 45,031 19,547 43.4 Income Tax Expense 11,824 9,097 2,727 30.0 Net Income$ 52,754 $ 35,934 $ 16,820 46.8 % Operating Revenues increased$80.5 million primarily due to rising PVC pipe prices and increased sales volumes within our Plastics segment and increased volumes and material cost, leading to increased sales prices, in our Manufacturing segment. Increased transmission services and wholesale revenues, partially offset by decreased retail revenues, within our Electric segment also contributed to higher operating revenues in the third quarter of 2021 compared to the same period last year. See our segment disclosures below for additional discussion of items impacting operating revenues. Operating Expenses increased$58.7 million primarily due to increased costs of products sold in our Manufacturing and Plastics segments due to increased raw material costs and higher sales volumes, as well as increased labor costs. Operating expenses in our Electric segment increased primarily due to higher depreciation and amortization expense arising from our recent rate base investments and higher operating and maintenance expenses. See our segment disclosures below for additional discussion of items impacting operating expenses. Interest Charges increased$1.1 million due to interest expense from our$40.0 million long-term debt issuance inAugust 2020 , a higher level of short-term borrowings outstanding in 2021 compared to 2020 and a decrease in capitalized interest in 2021 following the completion and placement in service ofAstoria Station in the first quarter of 2021. Other Income decreased$1.5 million primarily due to lower earned equity AFUDC due to the completion and placement in-service ofAstoria Station in the first quarter of 2021. During the construction ofAstoria Station we earned AFUDC in ourMinnesota jurisdiction. Income Tax Expense increased$2.7 million primarily due to increased income before income taxes. Our effective tax rate was 18.3% in the third quarter of 2021 and 20.2% in the third quarter of 2020. The decrease in our effective tax rate was driven by PTCs earned in the third quarter of 2021 from ourMerricourt wind farm, which was placed in service in the fourth quarter of 2020, partially offset by other permanent differences. See Note 8 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding factors impacting our effective tax rate in 2021 and 2020.
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Table of Contents ELECTRIC SEGMENT RESULTS The following table summarizes Electric segment operating results for the three months endedSeptember 30, 2021 and 2020: (in thousands) 2021 2020 $ change % change Retail Revenues$ 96,438 $ 99,605 $ (3,167) (3.2) % Transmission Services Revenues 13,300 12,288 1,012 8.2 Wholesale Revenues 6,944 1,500 5,444 362.9 Other Electric Revenues 2,093 1,830 263 14.4 Total Operating Revenues 118,775 115,223 3,552 3.1 Production Fuel 17,698 11,554 6,144 53.2 Purchased Power 9,878 13,428 (3,550) (26.4) Operating and Maintenance Expenses 36,465 32,845 3,620 11.0 Depreciation and Amortization 17,874 15,647 2,227 14.2 Property Taxes 4,474 4,333 141 3.3 Operating Income$ 32,386 $ 37,416 $ (5,030) (13.4) % 2021 2020 change % change Electric kilowatt-hour (kwh) Sales (in thousands) Retail kwh Sales 1,076,580 1,075,336 1,244 0.1 % Wholesale kwh Sales - Company Generation 174,187 75,884 98,303 129.5 Heating Degree Days 3 61 (58) (95.1) Cooling Degree Days 463 363 100 27.5 The operating results of our Electric segment are impacted by fluctuations in weather conditions and the resulting demand for electricity for heating and cooling. The following table shows heating and cooling degree days as a percent of normal for the three months endedSeptember 30, 2021 and 2020. 2021 2020 Heating Degree Days 5.8 % 115.1 % Cooling Degree Days 132.7 % 104.6 % The following table summarizes the estimated effect on diluted earnings per share of the difference in retail kwh sales under actual weather conditions and expected retail kwh sales under normal weather conditions in 2021 and 2020, and between years. 2021 vs 2021 vs 2020 vs Normal 2020 Normal
Effect on Diluted Earnings Per Share
Retail Revenues decreased$3.2 million primarily due to the following: •The recognition of$2.6 million ofMinnesota transmission rider revenue in the third quarter of 2020 resulting from a favorable judicial decision regarding the state jurisdictional treatment of federally approved transmission projects. •A$1.2 million decrease in fuel recovery revenues largely due to lower purchased power costs and credits provided to retail customers from increased margins on wholesale sales, but partially offset by increased recovery of higher production fuel costs. •A decrease in revenue from the combination of reduced demand from residential and commercial and industrial customers, exclusive of the impact of weather, net of the effect of a change in customer usage mix. These decreases in revenue were partially offset by a$1.2 million increase in consumption from the favorable impact of weather in the third quarter of 2021 compared to the same period last year. Transmission Services Revenues increased$1.0 million primarily due to increased generator interconnection revenues. Wholesale Revenues increased$5.4 million as a result of a 129.5% increase in wholesale sales volumes and a 101.7% increase in wholesale prices driven by increased fuel costs and market demand for wholesale energy. Production Fuel costs increased$6.1 million mainly as a result of a 41.4% increase in kwhs generated from our fuel-burning plants due to higher demand and favorable prices for energy in wholesale markets. In addition, increased fuel cost per kwh also contributed to higher production fuel costs in the third quarter of 2021.Purchased Power costs to serve retail customers decreased$3.6 million primarily due to a 48.9% decrease in the volume of purchased power as our recent capacity additions provide additional generation resources to serve customer demand and market conditions led to operating our
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Table of Contents existing facilities at higher capacity factors in lieu of purchasing power at higher market prices, but partially offset by an increase in the cost of purchased power per kwh in the third quarter of 2021. Operating and Maintenance Expense increased$3.6 million mainly due to: •$1.4 million of Merricourt andAstoria Station operating and maintenance expenses incurred in the third quarter of 2021 as these facilities are now commercially operational. •$2.1 million of maintenance costs arising from our planned outage atBig Stone plant, which began in the third quarter of 2021 and we expect will be completed in the fourth quarter of the year. •Other additional expenses include an increase in transmission tariff expense from higher transmission volumes and increased travel costs as business travel recovers from the impact of COVID-19. These expense increases were partially offset by, among other items, lower operating costs following the closure of HootLake Plant inMay 2021 and lower bad debt expense due to improving customer collections as the economic impact of COVID-19 has eased. Depreciation and Amortization expense increased$2.2 million primarily due to Merricourt andAstoria Station being placed in service in the fourth quarter of 2020 and the first quarter of 2021, respectively. MANUFACTURING SEGMENT RESULTS The following table summarizes Manufacturing segment operating results for the three months endedSeptember 30, 2021 and 2020: (in thousands) 2021 2020 $ change % change Operating Revenues$ 89,977 $ 59,849 $ 30,128 50.3 % Cost of Products Sold (excluding depreciation) 70,148 44,444 25,704 57.8 Other Operating Expenses 10,161 6,901 3,260 47.2 Depreciation and Amortization 3,794 3,759 35 0.9 Operating Income$ 5,874 $ 4,745 $ 1,129 23.8 % Operating Revenues increased$30.1 million primarily due to a 41.3% increase in material costs at BTD, which is passed through to customers, as steel prices increased significantly from the previous year. Steel prices have increased as steel mill production has not matched customer demand as mill capacity recovers from shutdowns in 2020 resulting from the COVID-19 pandemic. A 4.0% increase in sales volumes and an increase in scrap revenues, primarily due to higher scrap metal prices, also contributed to the increase in operating revenues. We anticipate steel prices will remain elevated for the remainder of 2021 and into 2022. Increased horticultural product sales volumes at T.O. Plastics in 2021, driven by increasing customer demand, as well as increased sales prices also contributed to increased operating revenues in 2021 as compared to 2020. Cost of Products Sold increased$25.7 million primarily due to increased volumes and higher material, labor and freight costs at BTD. The increase in material cost is largely driven by increased steel prices as mentioned above. The increases in labor and freight costs and lower productivity resulted in lower gross profit margins compared to the same period in 2020. Lower productivity during the period was primarily the result of recent increases in headcount and the time required for new employee to achieve peak productivity. Increased sales volumes and production activity at T.O. Plastics also contributed to the increase in cost of products sold in 2021. Other Operating Expenses increased$3.3 million in the third quarter of 2021 compared to 2020. In the third quarter of 2021 other operating expenses were impacted by increased incentive based compensation and other costs necessary to support higher business volumes. PLASTICS SEGMENT RESULTS The following table summarizes Plastics segment operating results for the three months endedSeptember 30, 2021 and 2020: (in thousands) 2021 2020 $ change % change Operating Revenues$ 107,542 $ 60,693 $ 46,849 77.2 % Cost of Products Sold (excluding depreciation) 64,064 42,415 21,649 51.0 Other Operating Expenses 3,832 3,250 582 17.9 Depreciation and Amortization 1,099 905 194 21.4 Operating Income$ 38,547 $ 14,123 $ 24,424 172.9 % Operating Revenues increased$46.8 million , primarily due to a 103.6% increase in the price per pound of PVC pipe sold. The increase in sale prices was largely due to the combination of PVC resin supply constraints, which has led to limited PVC pipe inventory, and strong demand for PVC pipe products. Resin supply in the third quarter of 2021 was negatively impacted by disruptions caused by Hurricane Ida in theGulf Coast region, which compounded supply constraints that began in the first quarter of 2021 as a result of plant shutdowns caused by extreme winter weather. Pounds of pipe sold in the third quarter of 2021 decreased 13.0% from the same period last year. We anticipate sales prices will remain elevated throughout the remainder of 2021 and into 2022, as resin suppliers work to fulfill purchase allotments and pipe manufacturers continue to replenish depleted inventories while customer demand remains strong. Cost of Products Sold increased$21.6 million primarily due to increased PVC resin and other input material costs per pound, which increased 91.7% compared to the same period in the previous year. Increases in labor and freight costs in 2021 also contributed to the increase in cost of products sold.
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Table of Contents Other Operating Expenses increased$0.6 million as a result of an increase in variable costs associated with the increased financial results in 2021. CORPORATE COSTS The following table summarizes Corporate operating results for the three months endedSeptember 30, 2021 and 2020: (in thousands) 2021 2020 $ change % change Other Operating Expenses$ 2,231 $ 3,471 $ (1,240) (35.7) % Depreciation and Amortization 48 84 (36) (42.9) Operating Loss$ 2,279 $ 3,555 $ (1,276) (35.9) % Other Operating Expenses decreased$1.2 million primarily due to decreased stock and incentive based compensation cost as a result of the timing of expense recognition, which can fluctuate due to changes in estimates of annual financial performance relative to targeted amounts. RESULTS OF OPERATIONS - YEAR TO DATE Intersegment transactions were not material in 2021 or 2020 and amounted to less than$0.1 million of operating revenues and operating expenses for each period. CONSOLIDATED RESULTS The following table summarizes consolidated operating results for the nine months endedSeptember 30, 2021 and 2020: (in thousands) 2021 2020 $ change % change Operating Revenues$ 863,612 $ 663,258 $ 200,354 30.2 % Operating Expenses 685,063 543,331 141,732 26.1 Operating Income 178,549 119,927 58,622 48.9 Interest Charges 28,601 25,353 3,248 12.8 Nonservice Cost Components of Postretirement Benefits 1,511 2,581 (1,070) (41.5) Other Income 2,095 3,733 (1,638) (43.9) Income Before Income Taxes 150,532 95,726 54,806 57.3 Income Tax Expense 25,380 18,543 6,837 36.9 Net Income$ 125,152 $ 77,183 $ 47,969 62.1 % Operating Revenues increased$200.4 million primarily due to higher PVC pipe prices within our Plastics segment and increased volumes and material costs, leading to higher sales prices, in our Manufacturing segment. Increased transmission services and wholesale revenues within our Electric segment also contributed to the higher operating revenues in 2021. See our segment disclosures below for additional discussion of items impacting operating revenues. Operating Expenses increased$141.7 million in 2021 primarily due to increased costs of products sold in our Plastics and Manufacturing segments due to higher raw material costs and sales volumes. Operating expenses in our Electric segment increased primarily from higher operating and maintenance and depreciation and amortization expenses, in each case largely the result of our recent rate base investments and the associated operating costs of such investments. See our segment disclosures below for additional discussion of items impacting operating expenses. Interest Charges increased$3.2 million in 2021 due to a debt issuance in our Electric segment in the third quarter of 2020, increased outstanding borrowings under our short-term debt arrangements, both of which were largely used to finance rate base investments in our Electric segment, and a decrease in capitalized interest in 2021 due to the completion and placement in service ofAstoria Station in the first quarter of 2021. Nonservice Cost Components of Postretirement Benefits decreased$1.1 million in 2021 due to a change in how prescription drug coverage is provided to retirees and the impact of nonservice costs from a decrease in the discount rate from 2020 to 2021. Other Income decreased$1.6 million in 2021 due to a$2.7 million decrease in earned equity AFUDC due primarily to the completion and placement in service ofAstoria Station in the first quarter of 2021, but partially offset by increases in the values of corporate-owned life insurance policies and other investments in 2021 compared to 2020. Income Tax Expense increased$6.8 million in 2021 primarily due to increased income before income taxes. Our effective tax rate was 16.9% in 2021 and 19.4% in 2020 with the decrease primarily driven by PTCs earned in 2021 from ourMerricourt wind farm, which was placed in service in the fourth quarter of 2020. See Note 8 to our consolidated financial statements included in the report on Form 10-Q for additional information regarding factors impacting our effective tax rate.
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Table of Contents ELECTRIC SEGMENT RESULTS The following table summarizes Electric segment operating results for the nine months endedSeptember 30, 2021 and 2020: (in thousands) 2021 2020 $ change % change Retail Revenues$ 291,130 $ 291,761 $ (631) (0.2) % Transmission Services Revenues 37,085 32,802 4,283 13.1 Wholesale Revenues 14,711 3,141 11,570 368.4 Other Electric Revenues 5,703 5,548 155 2.8 Total Operating Revenues 348,629 333,252 15,377 4.6 Production Fuel 44,576 34,077 10,499 30.8 Purchased Power 40,273 45,940 (5,667) (12.3) Operating and Maintenance Expenses 114,615 106,639 7,976 7.5 Depreciation and Amortization 53,335 47,063 6,272 13.3 Property Taxes 13,136 12,601 535 4.2 Operating Income$ 82,694 $ 86,932 $ (4,238) (4.9) % Electric kilowatt-hour (kwh) Sales (in thousands) Retail kwh Sales 3,511,730 3,538,299 (26,569) (0.8) % Wholesale kwh Sales - Company Generation 358,761 156,948 201,813 128.6 Heating Degree Days 3,614 3,968 (354) (8.9) Cooling Degree Days 700 533 167 31.3 The operating results of our Electric segment are impacted by fluctuations in weather conditions and the resulting demand for electricity for heating and cooling. The following table shows heating and cooling degree days as a percent of normal for the nine months endedSeptember 30, 2021 and 2020. 2021 2020 Heating Degree Days 89.9 % 99.3 % Cooling Degree Days 150.9 % 116.9 % The following table summarizes the estimated effect on diluted earnings per share of the difference in retail kwh sales under actual weather conditions and expected retail kwh sales under normal weather conditions in 2021 and 2020, and between years. 2021 vs 2021 vs 2020 vs Normal 2020 Normal
Effect on Diluted Earnings Per Share
Retail Revenues decreased$0.6 million primarily due to the following: •A$4.7 million decrease in fuel recovery revenues largely due to lower purchased power costs and credits provided to retail customers from increased margins on wholesale sales, but partially offset by increased recovery of higher production fuel costs. •The recognition of$2.6 million ofMinnesota transmission rider revenue in the third quarter of 2020 resulting from a favorable judicial decision regarding the state jurisdictional treatment of federally approved transmission projects. •A$1.6 million decrease in revenue from the combination of reduced demand from residential and commercial and industrial customers, exclusive of the impact of weather, net of the effect of a change in customer usage mix. These decreases in revenue were partially offset by the following: •A$3.6 million increase in rider revenues primarily related to the recovery of Merricourt andAstoria Station project costs and operating expenses. •A$3.0 million increase in new revenue from an interim rate increase inMinnesota , net of estimated refunds, effectiveJanuary 1, 2021 in connection with our rate case filed inNovember 2020 . •A$2.1 million increase in revenue from transmission rider recovery, due to increased transmission investments, and increased conservation improvement program spending. Transmission Services Revenues increased$4.3 million primarily due to increased recovery of higher transmission costs and increased transmission investment as well as increased generator interconnection revenues.
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Table of Contents Wholesale Revenues increased$11.6 million as a result of a 128.6% increase in wholesale sales volumes and a 104.9% increase in wholesale electric prices, primarily driven by increased fuel costs and high market demand for wholesale energy, which serves to drive up spot market prices for electricity. Production Fuel costs increased$10.5 million primarily as a result of a 30.8% increase in kwhs generated from our fuel-burning plants due to higher demand and favorable prices for energy in wholesale markets.Purchased Power costs to serve retail customers decreased$5.7 million mainly due to a 26.7% decrease in the volume of purchased power as our recent capacity additions provide additional generation resources to serve customer demand and market conditions led to operating our existing facilities at higher capacity factors in lieu of purchasing power at higher market prices. Operating and Maintenance Expense increased$8.0 million , which was primarily the result of: •$4.0 million of Merricourt andAstoria Station operating and maintenance expenses incurred in 2021 as these facilities are now commercially operational. •$2.1 million of maintenance costs arising from our planned outage atBig Stone plant, which began in the third quarter of 2021 and we expect will be completed in the fourth quarter of the year. •Other additional costs including a$1.6 million increase in transmission tariff expenses, a$1.0 million increase in vegetative maintenance cost, and an increase in conservation program expenditures. These expense increases were partially offset by, among other items,$1.7 million of lower bad debt expense due to improving customer collections as the economic impact of COVID-19 has eased and lower operating costs following the closure of HootLake Plant inMay 2021 . Depreciation and Amortization expense increased$6.3 million primarily due to Merricourt andAstoria Station being placed in service in the fourth quarter of 2020 and inFebruary 2021 , respectively. MANUFACTURING SEGMENT RESULTS The following table summarizes Manufacturing segment operating results for the nine months endedSeptember 30, 2021 and 2020: (in thousands) 2021 2020 $ change % change Operating Revenues$ 250,085 $ 174,276 $ 75,809 43.5 % Cost of Products Sold (excluding depreciation) 189,183 131,145 58,038 44.3 Other Operating Expenses 28,109 19,678 8,431 42.8 Depreciation and Amortization 11,395 11,244 151 1.3 Operating Income$ 21,398 $ 12,209 $ 9,189 75.3 % Operating Revenues increased$75.8 million primarily due to higher revenues at BTD, which was largely driven by a 15.6% increase in sales volumes and a 25.5% increase in material costs, which are passed through to customers through increased sales prices. The increase in material costs is largely the result of historically high steel prices due to supply shortages as steel mill capacity rebounds from capacity reductions in 2020. Sales volumes in 2020 were negatively impacted by COVID-19 as customers implemented temporary plant shutdowns due to the pandemic. Sales volumes in 2021 have rebounded as customer demand across most end markets has been robust. An increase in horticultural product sales volumes at T.O. Plastics in 2021, driven by increasing customer demand, as well as increased sales prices, also contributed to increased operating revenues in 2021. Cost of Products Sold increased$58.0 million primarily due to increased volumes and higher material, labor and freight costs at BTD. The increase in material cost is largely the result of high steel prices as mentioned above. Year to date gross profit margins are consistent with the prior year as increases in labor and freight costs and lower productivity in the third quarter of 2021 have been offset by higher sales volumes, as higher volumes have resulted in greater leveraging of fixed production costs. Increased sales volumes and production activity at T.O. Plastics has also contributed to the increase in cost of products sold in 2021. Year to date gross profit margins at T.O. Plastics increased compared to the same period in 2020, as higher production activities have resulted in greater leveraging of fixed production costs and sales prices have increased, resulting from input material cost inflation. Other Operating Expenses increased$8.4 million in 2021 compared to 2020. Other operating expenses in 2020 were reduced by initiatives taken to reduce costs in an effort to mitigate the impact of declining sales volumes from the effects of COVID-19. Other operating expenses in 2021 were impacted by an increase in incentive based compensation arising from the improvement in financial results, and an increase in costs necessary to support the increase in business volumes.
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Table of Contents PLASTICS SEGMENT RESULTS The following table summarizes Plastics segment operating results for the nine months endedSeptember 30, 2021 and 2020: (in thousands) 2021 2020 $ change % change Operating Revenues$ 264,898 $ 155,769 $ 109,129 70.1 % Cost of Products Sold (excluding depreciation) 169,584 115,432 54,152 46.9 Other Operating Expenses 10,450 8,990 1,460 16.2 Depreciation and Amortization 3,200 2,667 533 20.0 Operating Income$ 81,664 $ 28,680 $ 52,984 184.7 % Operating Revenues increased$109.1 million , primarily due to a 71.1% increase in the price per pound of PVC pipe sold. As discussed above, sale prices have rapidly increased in 2021 due to the combination of PVC resin supply constraints, which has led to limited PVC pipe inventory, and strong demand for PVC pipe products. Resin supply constraints has impacted our production and sales volumes were down slightly compared to the previous year. Cost of Products Sold increased$54.2 million primarily due to increased PVC resin and other input costs, which increased 60.3% compared to the same period in the previous year. Increases in labor and freight costs in 2021 also contributed to the increase in cost of products sold. Other Operating Expenses increased$1.5 million as a result of an increase in variable costs associated with increased financial results in 2021. CORPORATE COSTS The following table summarizes Corporate operating results for the nine months endedSeptember 30, 2021 and 2020: (in thousands) 2021 2020 $ change % change Other Operating Expenses$ 7,028 $ 7,638 $ (610) (8.0) % Depreciation and Amortization 179 256 (77) (30.1) Operating Loss$ 7,207 $ 7,894 $ (687) (8.7) %
Other Operating Expenses decreased
The following provides a summary of general rate case filings, rate rider filings and other regulatory filings that have or are expected to have a material impact on our operating results, financial position or cash flows.GENERAL RATES Minnesota Rate Case: OnNovember 2, 2020 , OTP filed a request with the MPUC for an increase in revenue recoverable through base rates inMinnesota . In its filing, OTP requested a net increase in annual revenue of approximately$14.5 million , or 6.77%, based on an allowed rate of return on rate base of 7.59% and an allowed rate of return on equity of 10.20% on an equity ratio of 52.5% of total capital. Through this proceeding, OTP has proposed changes to the mechanism of cost recovery, with some costs moving from riders into base rates and fuel, purchased power, and conservation program costs moving out of base rates and into riders. The filing also included a revenue decoupling mechanism proposal. Such mechanisms are designed to separate a utility's revenue from changes in energy sales. The decoupling mechanism uses a tracker balance through which authorized customer margins are subject to a true-up mechanism to maintain or cap a given level of revenues. OnDecember 3, 2020 , the MPUC approved an interim annual rate increase of$6.9 million , or 3.2%, effectiveJanuary 1, 2021 . This approval was provided after an alternative recovery proposal was submitted by OTP, which, among other changes, requested the extension of depreciable lives of certain wind-related assets and deferred certain cost recovery decisions to the final rate determination. In the aggregate, this alternative recovery proposal reduced operating costs and delayed recovery of certain other costs by approximately$7.0 million to lessen the interim rate impact on customers. In a filing submitted to the MPUC onApril 30, 2021 , OTP lowered its requested net annual revenue increase from its initial request of$14.5 million to$8.2 million , primarily due to a reduction in operating costs from amounts included in itsNovember 2020 filing. The cost reductions include, among other items, lower depreciation expense on our wind generation assets due to the extension of depreciable lives from 25 to 35 years and a reduction in postretirement benefit costs. OnSeptember 20, 2021 , the Administrative Law Judge assigned to our rate case issued his recommendations to the MPUC, and the MPUC is expected to hold deliberations in early November with a written order expected to be issued by the end ofJanuary 2022 . We anticipate final rates will be implemented by mid-2022.
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RATE RIDERS
The following table includes a summary of pending and recently concluded rate
rider proceedings:
Recovery Filing Amount Effective
Mechanism Jurisdiction Status Date (in millions) Date Notes
RRR 2019 MN Approved 06/21/19 $ 12.5 01/01/20 Includes return on Merricourt
construction costs.
TCR 2018 MN Approved 05/07/20 10.3 01/21/20 See below for additional details.
Includes recovery of new infrastructure
EUIC 2021 MN Requested 06/07/21 1.3 01/01/22 costs, including advanced metering,
outage management and demand response
systems.
RRR 2021 ND Approved 03/07/21 11.8 04/01/21 Includes return on Merricourt
construction costs.
GCR 2020 ND Approved 06/10/20 6.2 07/01/20 Includes return on Astoria Station
construction costs.
TCR 2022 ND Requested 09/15/21 6.1 01/01/22 Includes recovery of three new
transmission projects/programs.
RRR 2020 ND Approved 03/18/20 5.8 04/01/20 Includes return on Merricourt
construction costs.
TCR 2020 ND Approved 08/31/20 5.6 01/21/20 Includes recovery of new transmission
assets.
TCR 2021 ND Approved 11/18/20 5.6 01/01/21 Includes recovery of eight new
transmission projects.
Includes recovery of Astoria Station,
GCR 2021 ND Approved 03/01/21 5.2 07/01/21 net ofanticipated savings associated
with the retirement of Hoot Lake Plant.
TCR 2020 SD Approved 01/29/20 2.3 03/02/20 Annual update to transmission cost
recovery rider.
TCR 2021 SD Approved 02/19/21 2.2 03/01/21 Includes recovery of two new
transmission projects.
PIR 2020 SD Approved 05/31/20 1.6 09/01/20 Includes return on Merricourt and
Astoria Station construction costs.
Minnesota TCR. On May 1, 2017 , the MPUC ordered OTP to include in the TCR rider
retail rate base the Minnesota jurisdictional share of OTP's investments in
certain transmission assets and all revenues received from other utilities under
MISO's tariffed rates as a credit in its TCR revenue requirement calculations.
The order had the effect of diverting interstate wholesale revenues that have
been approved by the FERC to offset the FERC -approved expenses, effectively
reducing OTP's recovery of FERC -approved expense levels.
On August 18, 2017 , OTP filed an appeal of the MPUC order with the Minnesota
Court of Appeals to contest the portion of the order requiring OTP to
jurisdictionally allocate costs of the FERC transmission projects in the TCR
rider. On June 11, 2018 , the Minnesota Court of Appeals reversed the MPUC's
order. On July 11, 2018 , the MPUC filed a petition for review of the decision to
the Minnesota Supreme Court , which granted review of the appellate court
decision. The Minnesota Supreme Court issued its opinion on April 22, 2020 ,
concluding the MPUC lacked authority to amend an existing TCR rider approved
under Minnesota state law to include the costs and revenues associated with
these transmission projects and affirming the decision of the Minnesota Court of
Appeals .
On October 22, 2020 , the MPUC approved OTP's request for a Minnesota TCR rider
update with the exclusion of these transmission projects. In addition, the MPUC
approved the inclusion of three new projects previously requested in the
Minnesota TCR rider eligibility petition. Updated rates went into effect in
January 2021 . With this decision, one-half of the projected TCR rider tracker
balance at December 2020 of $13.4 million will be included in the 2021 TCR rider
annual revenue requirement, with the remainder included in the next annual
update. The annual updates provide for recovery of approximately $2.6 million in
MISO revenues credits to Minnesota customers through the TCR rider prior to
September 30, 2020 . As a result, OTP recognized additional rider revenue of $2.6
million during the third quarter of 2020.
INTEGRATED RESOURCE PLAN
Minnesota law requires utilities to submit to the MPUC for approval a 15-year
advance IRP. A resource plan is a set of resource options a utility could use to
meet the service needs of its customers over a forecast period, including an
explanation of the utility's supply and demand circumstances, and the extent to
which each resource option would be used to meet those service needs. Typically,
the filings are submitted every two years.
On September 1, 2021 , OTP filed its 2022 IRP concurrently with regulators in the
three states where OTP operates, Minnesota , North Dakota and South Dakota . The
2022 IRP includes OTP's preferred plan for meeting customers' anticipated
capacity and energy needs while maintaining system reliability and low electric
service rates.
The components of OTP's preferred plan include:
-the addition of dual fuel capability at our Astoria Station natural gas plant,
allowing for the plant to burn fuel oil in addition to natural gas;
-the addition of 150 megawatts of solar generation in 2025;
-the addition of 100 megawatts of wind generation in 2027;
-the commencement of the process of withdrawing from our 35 percent ownership
interest in Coyote Station , a jointly owned, coal-fired generation plant, by
December 31, 2028 ; and
-the addition of 50 megawatts of solar generation in 2033.
The 2022 IRP requests approval for certain activities planned to commence within
the next five years, which include the addition of dual fuel capacity at our
Astoria Station natural gas plant, the addition of 150 megawatts of solar
generation, and the withdrawal from our ownership interest in Coyote Station .
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Table of Contents The preferred plan proposes to, subject to regulatory approval, create a regulatory asset as a vehicle to recover costs related to the future withdrawal fromCoyote Station , including the net book value of the plant on the withdrawal date, anticipated decommissioning costs, and any costs incurred if a termination of the existing lignite sales agreement under whichCoyote Station acquires all of its lignite coal fuel from a nearby mine is necessary. For its economic analysis, OTP developed an estimate of the reasonably foreseeable costs of withdrawing fromCoyote Station at the end of 2028 of$68.5 million . These costs may differ from actual results due to the uncertainty and timing of future events associated with the terms and conditions of a withdrawal. LIQUIDITY LIQUIDITY OVERVIEW We believe our financial condition is strong and our cash, other liquid assets, operating cash flows, existing lines of credit, access to capital markets, and borrowing ability because of investment-grade credit ratings, when taken together, provide us ample liquidity to conduct our business operations and fund our capital expenditure plans. Our liquidity, including our operating cash flows and access to capital markets, can be impacted by macroeconomic factors outside of our control, such as those which may be caused by COVID-19. In addition, our liquidity could be impacted by non-compliance with covenants under our various debt instruments. As ofSeptember 30, 2021 , we were in compliance with all debt covenants (see the Financial Covenants section under Capital Resources below). The following table presents the status of our lines of credit as ofSeptember 30, 2021 andDecember 31, 2020 : 2021 2020 Amount Letters Amount Amount (in thousands) Line Limit Outstanding of Credit Available Available
OTC Credit Agreement$ 170,000 $ 36,624 $ -$ 133,376 $ 104,834 OTP Credit Agreement 170,000 61,233 13,159 95,608 140,068 Total$ 340,000 $ 97,857 $ 13,159 $ 228,984 $ 244,902 We have an internal risk tolerance metric to maintain a minimum of$50 million of liquidity under the OTC Credit Agreement. Should additional liquidity be needed, this agreement includes an accordion feature allowing us to increase the amount available to$290 million , subject to certain terms and conditions. The OTP Credit Agreement also includes an accordion feature allowing OTP to increase that facility to$250 million , subject to certain terms and conditions. CASH FLOWS The following is a discussion of our cash flows for the nine months endedSeptember 30, 2021 and 2020: (in thousands) 2021 2020
Net Cash Provided by Operating Activities
Net Cash Provided by Operating Activities increased$13.5 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The increase in cash provided by operating activities was the result of increased earnings during the year, which was partially offset by increased working capital needs. Our level of working capital increased year over year, and was impacted by increased accounts receivables within our Manufacturing and Plastics segments, due to strong sales volumes and significantly increased sales prices in 2021, and higher inventory levels within our Manufacturing segment due to higher production volumes and increased material costs in 2021, but partially offset by increased accounts payable due to higher production volumes and increased costs in our Manufacturing and Plastics segments in 2021. We made a discretionary contribution to our pension plan of$10.0 million in the nine months endedSeptember 30, 2021 compared to a contribution of$11.2 million in 2020. (in thousands) 2021 2020
Net Cash Used in Investing Activities decreased$105.3 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The decrease is primarily the result of lower capital investment within our Electric segment as capital spending on our large generation assets, Merricourt andAstoria Station , occurred throughout 2020 and was largely completed by the fourth quarter of 2020.
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Table of Contents (in thousands) 2021
2020
Net Cash (Used in) Provided by Financing Activities decreased$142.4 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , primarily as a result of a decrease in financing needs given the lower level of capital spending in our Electric segment in 2021 compared to 2020. Financing activities in the nine months endedSeptember 30, 2021 included a net borrowing increase of$16.9 million under our line of credit facilities and dividend payments of$48.6 million ($1.17 per share). Financing activities in the nine months endedSeptember 30, 2020 included proceeds of$75.0 million from the issuance of long-term debt, a net borrowing increase of$42.6 million under our line of credit facilities and$34.8 million in proceeds raised from the issuance of common stock, net of issuance costs. We paid dividends of$45.1 million ($1.11 per share) in the nine months endedSeptember 30, 2020 . CAPITAL REQUIREMENTS CAPITAL EXPENDITURES We have a capital expenditure program for expanding, upgrading and improving our plants and operating equipment. Typical uses of cash for capital expenditures are investments in electric generation facilities and environmental upgrades, transmission and distribution lines, manufacturing facilities and upgrades, equipment used in the manufacturing process, and computer hardware and information systems. Our capital expenditure program is subject to review and regulatory approval and is revised in light of changes in demands for energy, technology, environmental laws, regulatory changes, business expansion opportunities, the costs of labor, materials and equipment and our financial condition. Our 2022 IRP, filed with the MPUC onSeptember 1, 2021 , outlined our preferred plan for meeting our electric customers' anticipated energy needs while maintaining system reliability, which included significant planned additions and enhancements to our electric fleet of assets. The following provides a summary of the actual capital expenditures for the year endedDecember 31, 2020 , and the anticipated capital expenditures for the period 2021 through 2026, for our Electric segment, inclusive of the additions outlined in our 2022 IRP, and our non-electric businesses: Total (in millions) 2020 2021(1) 2022 2023 2024 2025 2026 2022 - 2026 Electric Segment:Renewables and Natural Gas Generation 23 30 80 92 92 160 454 Technology and Infrastructure 2 26 30 18 - - 74 Distribution Plant Replacements 31 37 35 35 35 33 175 Transmission (includes replacements) 27 26 28 24 20 27 125 Other 34 30 29 32 36 23 150 Total Electric Segment$ 357 $ 117 $ 149 $ 202 $ 201 $ 183 $ 243 $ 978 Manufacturing and Plastics Segments 15 36 33 46 31 21 22 153 Total Capital Expenditures$ 372 $ 153
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Total Electric Utility Average Rate Base$ 1,385 $ 1,570
13.4 % 3.8 % 7.4 % 6.3 % 6.5 %
6.1 %
(1) Includes actual results for the nine months ended
CONTRACTUAL OBLIGATIONS Our contractual obligations primarily include principal and interest payments due under our outstanding debt obligations, commitments to acquire coal, energy and capacity commitments, payments to meet our postretirement benefit obligations, and payment obligations under land easement and leasing arrangements. Our contractual obligations as ofDecember 31, 2020 are included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year endedDecember 31, 2020 . There were no material changes in our contractual obligations outside of the ordinary course of our business during the nine months endedSeptember 30, 2021 . COMMON STOCK DIVIDENDS We paid dividends to our common stockholders totaling$48.6 million , or$1.17 per share, in the first nine months of 2021. The determination of the amount of future cash dividends to be paid will depend on, among other things, our financial condition, improvement in earnings per share, cash flows from operations, the level of our capital expenditures and our future business prospects. As a result of certain statutory limitations or regulatory or financing agreements, restrictions could occur on the amount of distributions allowed to be made by our subsidiaries. See Note 10 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information. The decision to declare a dividend is reviewed quarterly by our Board of Directors.
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Table of Contents CAPITAL RESOURCES Financial flexibility is provided by operating cash flows, unused lines of credit, and access to capital markets, which is aided by strong financial coverages and investment grade credit ratings. Equity or debt financing will be required in the period 2021 through 2025 to support our capital investments, primarily within our Electric segment to fund construction of new rate base and transmission investments. In addition, we may issue equity or debt financing to opportunistically reduce borrowings under our lines of credit, to satisfy or early retire our outstanding long-term debt, or to finance potential acquisition opportunities or for other corporate purposes. REGISTRATION STATEMENTS OnMay 3, 2021 , we filed two registration statements with theSEC . The first statement, a shelf registration, allows us to offer for sale, from time to time, either separately or together in any combination, equity, debt or other securities described in the registration statement. The second registration statement allows for the issuance of up to 1,500,000 common shares under our Automatic Dividend Reinvestment and Share Purchase Plan, which provides our common shareholders, retail customers of OTP and other interested investors a method of purchasing our common shares by reinvesting their dividends and/or making optional cash investments. Shares purchased under the plan may be new issue common shares or common shares purchased on the open market. Both registration statements expire inMay 2024 . SHORT-TERM DEBTOtter Tail Corporation andOtter Tail Power Company are each party to a credit agreement (the OTC Credit Agreement and OTP Credit Agreement, respectively) which each provide for unsecured revolving lines of credit. OnSeptember 30, 2021 ,Otter Tail Corporation entered into a Fourth Amended andRestated Credit Agreement andOtter Tail Power Company entered into a Third Amended and Restated Credit Agreement, amending and restating the previously existing credit agreements to extend the maturity date of each agreement toSeptember 30, 2026 . The borrowing capacity and other significant terms of the agreements remained unchanged from the previous credit agreements. The following is a summary of key provisions and borrowing information as of, and for the nine months ended,September 30, 2021 : OTC Credit OTP Credit (in thousands, except interest rates) Agreement Agreement Borrowing Limit$ 170,000 $ 170,000 Borrowing Limit if Accordion Exercised1 290,000 250,000
Amount Restricted Due to Outstanding Letters of Credit as of
- 13,159
Amount Outstanding as of September 30, 2021 36,624 61,233
Average Amount Outstanding During the Nine Months Ended
58,703 51,911
Maximum Amount Outstanding During the Nine Months Ended
79,718 72,471
Interest Rate as of September 30, 2021 1.59 % 1.33 %
September 30,
Maturity Date September 30, 2026 2026
1Each facility includes an accordion featuring allowing the borrower to increase the borrowing limit if certain terms and conditions are met.
LONG-TERM DEBT AtSeptember 30, 2021 , we had$767.0 million of principal outstanding under long-term debt arrangements. These instruments generally provide for unsecured borrowings at fixed rates of interest with maturities ranging from 2021 to 2050. OnJune 10, 2021 , OTP entered into a Note Purchase Agreement pursuant to which OTP agreed to issue, in a private placement transaction,$230 million aggregate principal amount of senior unsecured notes. The funding of the notes will occur in two issuances,$140 million inNovember 2021 and$90 million inMay 2022 . The issuance of the notes is subject to the satisfaction of certain customary conditions to closing. We intend to use the proceeds of the notes to refinance existing long-term indebtedness, including long-term debt instruments with outstanding principal balances of$140 million and$30 million , which mature inDecember 2021 andAugust 2022 , respectively, and for general corporate purposes. Note 6 to our consolidated financial statements included in this Quarterly Report on Form 10-Q includes additional information regarding these short-term and long-term debt instruments. Financial Covenants Certain of our short- and long-debt agreements requireOtter Tail Corporation and OTP to maintain certain financial covenants. As ofSeptember 30, 2021 , we were in compliance with these financial covenants as further described below:Otter Tail Corporation under its financial covenants, may not permit its ratio of interest-bearing debt to total capitalization to exceed 0.60 to 1.00, may not permit its interest and dividend coverage ratio to be less than 1.50 to 1.00, and may not permit its priority indebtedness to exceed 10% of our total capitalization. As ofSeptember 30, 2021 , our interest-bearing debt to total capitalization was 0.47 to 1.00, our interest and dividend coverage ratio was 5.73 to 1.00, and we had no priority indebtedness outstanding. OTP under its financial covenants, may not permit its ratio of debt to total capitalization to exceed 0.60 to 1.00, may not permit its interest and dividend coverage ratio to be less than 1.50 to 1.00, and may not permit its priority debt to exceed 20% of its total capitalization. As ofSeptember 30, 2021 , OTP's interest-bearing debt to total capitalization was 0.47 to 1.00, its interest and dividend coverage ratio was 3.16 to 1.00, and OTP had no priority indebtedness outstanding.
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Table of Contents OFF-BALANCE-SHEET ARRANGEMENTS As ofSeptember 30, 2021 we have outstanding letters of credit totaling$16.9 million , a portion of which reduces our borrowing capacity under our lines of credit. No outstanding letters of credit are reflected in outstanding short-term debt on our consolidated balance sheets. We do not have any other off-balance-sheet arrangements or any relationships with unconsolidated entities or financial partnerships. These entities are often referred to as structured finance special purpose entities or variable interest entities, which are established for the purpose of facilitating off-balance-sheet arrangements or for other contractually narrow or limited purposes. We are not exposed to any financing, liquidity, market or credit risk that could arise if we had such relationships. CRITICAL ACCOUNTING POLICIES INVOLVING SIGNIFICANT ESTIMATES The discussion and analysis of our results of operations are based on financial statements prepared in accordance with accounting principles generally accepted inthe United States of America . Certain of our accounting policies require management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities in the preparation of our consolidated financial statements. We have disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 the critical accounting policies that affect our most significant estimates and assumptions used in preparing our consolidated financial statements. There have been no material changes to our critical accounting policies and estimates from those disclosed in the most recent Annual Report on Form 10-K.
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